10 Ways to Avoid a Tax Audit
If you are running a business, small or large, you never want to be a target of an IRS tax audit. Even if your tax numbers are as close to perfect as possible, being audited is never pleasant. It means that you might start googling the best tax relief companies near me or that you might shift your focus from your business to making sure that you comply with the audit. It is, therefore, in your best interest not to get audited in the first place. Luckily, there are quite a few ways to avoid being audited, including never reporting a loss, triple-checking your math, and filing your taxes on time. This article will expand on those and provide you with seven more ways to avoid a tax audit.
The best ways to avoid a tax audit
Before we get into how you can avoid being audited, it is important to understand that even if you do everything perfectly, there is still a chance that the IRS audits you at random. It is a minuscule chance, however, as random audits only involve around .0010% of all tax returns. To get as close as possible to that number, you must be careful when preparing your tax returns. Here’s how you can do just that:
- Do not be different
- Never report a loss
- Make sure social security numbers are in order
- Try to be as specific about your expenses as possible
- File your taxes on time
- Be mindful of how you use tax credits and deductions
- Make sure all your paperwork match
- Do not make numbers up
- Triple-check your math
- Complete every line on your tax return
The best way to ensure you have the lowest chance of being audited is to hire a tax professional. They will help you both boost your tax refund amount and get the IRS off your back, so to speak. But if you are looking to manage your returns on your own, then you will want to closely follow the abovementioned ways to avoid a tax audit.
Usual is good
The first thing you need to understand about your tax returns is that ordinary is good. Being different might work in many other areas, but it is never good when it comes to tax returns. This is because the IRS is always on the lookout for any tax returns that are outside the norm. This may involve unnatural data patterns, outliers, and any information outside of regular parameters. Therefore, one of the best business tax tips for entrepreneurs that we can give you (which concerns tax reports) is to be as ordinary as you can possibly be.
What this means is that you don’t want to file any claims that might seem out of your regular operating parameters if you can avoid them. Sure, this might cut into your profits a bit but being audited may cost a lot more. Of course, this is all looking from the perspective that you want to avoid a tax audit at all costs. If you have the records to prove your claims and you don’t mind being on the receiving end of a tax audit, feel free to report any claim regardless of how “odd” it may seem.
Never report a loss on your tax return if you want to avoid a tax audit
One of the best ways to keep the IRS from auditing you is to never report a net annual loss. Any loss, especially a small one, sends a signal to the IRS that your business may need an audit. You may be able to slip through the cracks if you do so once or twice, but consistently reporting a loss is a surefire way to get audited.
The “trick” to not reporting a net loss lies in the fact that you are not required to report all of your expenses. That means you can leave out some of the yearly expenses and make it so that your business has made a small net profit for the year. However, this can also be seen as a suspicious activity if the unreported expenses are a regular part of your business. Therefore, you are advised to hire a professional tax consultant who will determine which expenses you may not want to report. But if you still want to do it on your own, try to check which expenses haven’t appeared on last year’s report. Omitting those expenses will appear much more typical than omitting expenses for the basic needs of your business.
Make sure that all SSNs are in order
It is relatively easy to transpose numbers when writing, typing, or when trying to recall them from memory. Doing so is one of the best ways to get audited by the IRS, in fact. For example, if the IRS sees that you have claimed a dependent with the wrong Social Security number, they will most likely choose to audit you. Therefore, before sending in your report, make sure that you double-check that all the SSNs are correct. This will also help you avoid and handle tax identity theft if it ever becomes a concern. By taking some time to ensure that all the numbers are correct, you are minimizing the chances of making a mistake and, consequently, getting audited.
Be specific about your expenses
It is pretty normal to take the “easy way out” and file some expenses under “Other expenses.” While it may be easier, it is also something that you don’t want to do unless you have to. It is always better to explicitly list your expenses and show the IRS that you are not making them up. This also means that you want to avoid “lumping together” expenses into a broader category. An example of this is combining all the advertising expenses under simply “advertising” instead of itemizing each expenditure on its own.
This does mean that there will be a bit more work involved, but being specific about your expenses will considerably lower the chance of an IRS audit. Furthermore, let’s say that you’ve taken advantage of several more tax reductions for businesses this year and decided to significantly increase some of your expenses. You will want to provide the IRS with additional paperwork explaining your decision. Otherwise, they may see the inflated expenses as something out of the ordinary and choose to audit you.
File your taxes sooner rather than later
There is a common misconception that filing your taxes late will reduce your chances of being audited. That is why so many business owners are looking into last minute tax filing tips. But the truth of the matter is that late filing will not influence your chances of an audit. However, creating a history of compliance and filing your taxes on time will decrease them. Therefore, if you really want to avoid a tax audit, you will do well to file your taxes on time, including all ancillary returns such as sales tax, payroll, etc.
Try not to “overuse” credits and tax deductions
Every business and individual has a staggering number of tax credits and tax deductions at their disposal. It can be very enticing to take advantage of as many of the popular tax deductions as you can, but it can also be a “double-edged sword” of sorts. For example, nearly 40% of all IRS audits are based on EITC (Earned Income Tax Credit). Basically, the more credits and tax deductions you use, the greater the chances of something going wrong. You may think a particular deduction is appropriate, but it might be restricted for one reason or another. It is always best to consult a tax professional if you want to maximize your tax credits and deductions. Otherwise, you must make sure to read the instructions on all tax forms very carefully.
Make sure that your paperwork matches your report
Speaking of tax forms, you will want to ensure they all match your report. You will be filing numerous tax forms, such as Form 1099-DIV, Form 720, Form 11-C, etc., and you need to make sure that everything in them matches the numbers that you report in your tax return. Any discrepancy may flag your business for an audit.
Never make up any numbers if you want to avoid a tax audit
We all tend to like clean numbers. But do you know who does not like clean numbers? That’s right, the IRS. That is why you don’t want to report a clean $1,000 for office expenses. Doing so indicates that you are guessing what your expenses are. And the IRS takes note of that. While it is possible that a round number may occur, it is not likely. Your office expenses are much more likely to be $997 than $1,000. Therefore, when you round up, round to the nearest dollar. Don’t round to the nearest hundred, especially not to the nearest thousand.
Lastly, keep any receipts for expenses you claim on your tax return. You might think you don’t need them, but you never know.
Always check your math
Filing a tax return involves a great deal of math. And it is really easy to make an error here and there. In fact, the IRS reports that math errors are one of the top mistakes that taxpayers make. Therefore, you want to make sure that all the numbers add up. This is particularly important regarding the first two pages of your tax return. You want to check all the numbers at least twice before sending your return.
There are two ways of making this easier for you. First, you can hire a tax professional to do your tax returns. This will help you cut your tax bills and avoid a tax audit. Alternatively, you may want to utilize specialized software to do the math. And even then, you will want to take time to ensure that all the numbers match. Neither software nor tax professionals are infallible.
Answer every question on your tax forms
The last tip we can give you is never to leave any question on any tax form unanswered. Even if the answer is simply “zero,” you will want to fill in the line. You are risking unwanted attention by not providing the IRS with a clear answer. And, by extension, an IRS audit. Therefore, ensure that every line has an appropriate answer and leave no blank spaces. That way, you will show that you’ve looked at and answered the question. Otherwise, the IRS may have questions.
Ways to avoid a tax audit explained
The chances of your business being audited are very small when it comes down to it. Unless you make millions of dollars in profits, the IRS will stay out of your hair. That said, if you want to avoid a tax audit at any cost, you will want to make your business look as normal as possible. The IRS looks for inconsistencies and errors first. If you give them nothing to worry about, they simply won’t.
For more information about filing taxes, the best tax relief companies, and various tax deductions and credits, Consumer Opinion Guide is your go-to resource. Our articles will provide you with all the information you may need to ensure you get the most out of your tax returns!